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Tilray Brands Inc(TLRY-Q)

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Is It Too Late to Buy Tilray Brands Stock?

Motley Fool - Wed Jan 31, 5:30AM CST

It's now been more than five years since Canada legalized adult-use cannabis, which led to a bit of a land rush into the industry. However, the hype turned out to be short-lived, and cannabis stocks have been a collective disaster since.

Even a company as prominent as Tilray Brands(NASDAQ: TLRY), arguably one of the leaders in the sector, has failed to produce anything even approaching solid and consistent performance, despite initially seeing its shares soar. Is there any hope left for Tilray Brands, or should investors take their money elsewhere?

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Tilray's diversified revenue base

The cannabis market in Canada has been a disaster. The competition is incredibly fierce, the government has been slow to issue licenses, and people are still buying weed through illegal channels. That's why many of the major companies have shifted to other markets to turn things around.

Tilray currently operates across four segments:

  • Cannabis
  • Distribution (which sells pharmaceutical and wellness products)
  • A hemp-focused segment called wellness
  • A beverage and alcohol unit

In the second quarter of its fiscal year 2024, ended Nov. 30, Tilray's total revenue increased by 35% year over year to $194 million. The growth was partly due to acquisitions, but Tilray's cannabis business accounted for just 35% of its total revenue. Distribution came in second with 34%, while Tilray's beverage and wellness segments accounted for 24% and 7%, respectively.

The company's decision to decrease its exposure to the cannabis market while remaining a leader in it (Tilray holds the leading market share in Canada) is a great one, in my view. It should allow Tilray to pursue other opportunities while still potentially taking advantage of the cannabis market if things change.

Tilray does remain unprofitable, but it also improved on that front in the period. The company's net loss of $46.2 million was better than the net loss of $61.6 million reported in the prior-year quarter.

A long and uncertain road ahead

Tilray is especially doubling down on its alcohol and beverages business. It recently completed the acquisition of 100% of the rights to Truss Beverage from Molson Coors, which helped solidify Tilray's position in the beverages market in Canada. Last year, the pot grower also bought eight beer and beverage brands from Anheuser-Busch InBev, making it the fifth-largest craft brewer in the U.S.

Thanks to these moves, Tilray's share of revenue from this segment will rise, but it's also a play for the future. The company hopes to dominate the market for cannabis-infused beverages.

Acquiring these companies and brands gives it several advantages. First, there's name recognition. Consumers interested in cannabis-infused drinks will probably be more likely to buy them if they're sold by companies or brands with which they're already familiar.

Second, Tilray already has established beverage operations in the U.S. to hit the ground running if, as management hopes, cannabis is legalized at the federal level and the sale of cannabis-infused beverages is allowed. Those are significant advantages over its competitors in the marijuana market.

However, the company's plans are by no means certain. The medical cannabis market that has helped sustain its revenue in recent years is getting increasingly competitive as more players turn their attention to it.

While its alcohol and beverages segment has also contributed, the company's plan to dominate the market for drinks mixed with cannabis in the U.S. still relies on a hypothetical legalization that may or may not happen anytime soon. Meanwhile, Tilray remains unprofitable, and the recreational cannabis market in Canada is still oversupplied.

What does that mean for investors? It isn't clear that Tilray will turn things around soon, or ever, and the best the company had to offer -- toward the early days of the legal cannabis market in Canada -- might well be over for good.

In my view, investors should take their money elsewhere.

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Prosper Junior Bakiny has no position in any of the stocks mentioned. The Motley Fool recommends Tilray Brands. The Motley Fool has a disclosure policy.

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